Sponsors urged to consider barriers to access as pension surpluses pass £400bn

Surpluses often trapped with accounting rules providing block on discretionary increases

Jonathan Stapleton
clock • 3 min read
Sponsors urged to consider barriers to access as pension surpluses pass £400bn

The debate around how to best utilise scheme surpluses is intensifying as pension funding levels hit record levels, PwC says.

The consulting firm said its defined benefit (DB) funding indices of the UK's 5,000 corporate DB pension schemes both showed significant surpluses at the end of May – with its gilts-plus Low Reliance Index posting a record surplus of £400bn and its Buyout Index recording a surplus of £255bn in May.

PwC said as the high levels of surplus for schemes continue to increase, so too do questions of how best to use these to benefit members and sponsors.

UK head of pensions funding and transformation John Dunn said: "With funding levels of the UK's DB schemes recording a record level of surplus of £400bn on our low reliance Index this month - the debate around how to best utilise this surplus is intensifying.

"From the sponsor's perspective, the surplus is often ‘trapped in the trust' and new rules are needed to allow surplus to be released while the scheme is ongoing. There are further barriers to giving surplus to members by increasing pensions, through accounting rules that determine how ‘discretionary' pension increases are treated in the sponsor's books."

PwC head of pensions financial reporting and partner Brian Peters added: "Using surplus to grant members additional pensions would typically result in a profit and loss (P&L) charge for the sponsor under the current UK and international accounting standards. In our discussions with sponsors, any P&L hit is often a complete red line – which can take additional ‘discretionary' pension increases off the table, even if they are paid out of the pension scheme's surplus assets.

"The accounting standards setters are unlikely to change established rules and practice so companies will need to balance the accounting treatment of granting additional benefits to scheme members against the extent to which the company and members will also benefit from the release of surplus. Understanding and communicating the potential impact on the P&L will be key to helping companies assess the merits of different ways of using surplus that has built up in their pension scheme."

The PwC indices measure the aggregate funding position of the UK's 5,000 corporate DB schemes.

Its low reliance index uses a discount rate assumption of gilt yields plus 0.5% per annum. These so-called "gilts plus" measures are often collectively referred to as funding targets where there is a low level of reliance on the company that ultimately supports the scheme. 

The firm's Buyout Index reflects PwC's view of indicative market pricing based on its current experience of completing buy-in and buyout transactions.

See more:

Professional Pensions' DB Funding Index

To read more on the legal treatment of pension surpluses see the article from Herbert Smith Freehills' Samantha Brown and Dan Saunders explaining the complexities around managing a buyout surplus when a scheme is going through a winding-up process. Separately, Sackers' Naomi Brown has looked at the broader issue of whether surplus scheme funds can be returned to the employer – an issue she says is a complex one. In a third article on the topic, Osborne Clarke's Jonathan Hazlett examines the tax implications of scheme surplus rules.

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